Irish private funds regime - good things come to those who wait

The passing of the Irish government’s Investment Limited Partnerships (Amendment) Act 2020 (the Act), together with the Central Bank of Ireland’s (the Central Bank) revisions to its rules relating to closed-ended funds, represent significant enhancements to the Irish private funds regime.

Currently private fund managers have no other real option in terms of onshore fund domiciles other than Luxembourg. Ireland can now provide a viable and purpose built alternative to the Luxembourg SCSp in the Irish Investment Limited Partnership (ILP).

Investment Limited Partnerships

The ILP is a regulated Irish fund structure which takes the form of a common law partnership. ILPs are regulated by the Central Bank and it is expected that the vast majority of ILPs will be authorized as qualifying investor alternative investment funds.

ILPs are constituted by a limited partnership agreement (LPA) and do not have legal personality. Each ILP must operate through a general partner (GP). The LPA is entered into between the GP and the investors of the ILP, ordinarily by way of a separate subscription agreement pursuant to which each investor provides authority to the GP to sign the LPA on their behalf. Upon admission of the investors as partners of the ILP, each such investor will become a limited partner (LP) of the ILP.

To date relatively few private funds have been set up as ILPs despite such structures being available in Ireland since 1994. Following discussions between the Irish funds industry, the Central Bank and the Irish Department of Finance, the perceived shortcomings associated with the ILP have now been addressed.

The ILP Act

The Act makes a number of positive changes. These include:

• modernising and improving the operation of ILPs. So, for example;
  • including additional “safe harbour” actions which expressly permit an LP to take certain actions (such as taking part in advisory committees in respect of the fund’s investments, or voting on a change to the LPA) without the LP losing its limited liability status;
  • confirming that, other than as provided for in the LPA, an LP is not liable make any capital contribution to the ILP (reinforcing that investors should not be liable for any partnership debts or obligations beyond their committed capital);
  • new provisions to make it easier to replace a GP, including the creation of a statutory novation of assets and liabilities when a GP is substituted, with these vesting in the incoming GP without the need for further formalities
  • providing a statutory footing for certain permitted actions in the event of an LP default;
• bringing the ILP Act better into line with the AIFMD and other EU legislation, including;
  • the amendment of existing requirements to better align these with EU standards, for example, in respect of depositary and valuation functions under the AIFMD;
  • modernising capital withdrawal requirements to reflect those under the AIFMD and those applicable in respect of other Irish regulated investment funds;
  • updating registration and record keeping requirements for ILPs to bring these into line with international standards;
  • aligning timeframes around the dissolution of an ILP with the requirements of the Central Bank; and
• permitting an ILP to register an "alternative foreign name" - this is intended to assist an ILP which is operating in a non-English speaking jurisdiction, (eg Chinese or other non-English characters may be used) to have official recognition of a translated name in that jurisdiction.

Rules with regard to closed-ended funds and ILPs

As we recently reported, the Central Bank has updated its AIFMD Q&As to confirm that the GP of an ILP no longer needs to be authorised as an AIF management company (a regulatory approval akin to an AIFM-lite). The previous requirement to obtain approval adversely impacted upon the attractiveness of the ILP as the approval process for an AIF management company could take up to six months and such entities were required to maintain EUR 125,000 as minimum regulatory capital. The Central Bank will now instead place reliance on the statutory obligations of the GP under the ILP Act and apply the central bank fitness and probity requirements to each director of a GP.

The Central Bank will also update its AIF Rulebook specifically to cater for closed-ended funds, whether structured as an ILP or in another legal form, including an ICAV. The updates include provision for excuse and exclude mechanisms, to clarify the ability to implement a carried interest waterfall and to allow for stage investing, which will be particularly attractive to those managers seeking to establish evergreen funds.

Conclusion

The revisions to the Irish private funds regime outlined above further bolster Ireland’s reputation as a highly attractive and competitive location in which to establish investment funds across the investment and liquidity spectrum.